Warren Buffett and his pal Charlie Munger always say that they are looking for companies that have a “durable competitive advantage” and have low debt levels. Well, if millions of people around the world are strongly addicted to your product, and you have no real debt to speak of, does that qualify (Buffett has in fact owned stock in a smokeless tobacco company, and the giant RJR Nabisco which sold tobacco products)? From a complete numbers point of view, it still pays to be with the tobacco companies instead of against them. Sure, popular culture in North America might be trending away from the old school Marlboro Man icon, but internationally cigarette sales have never been healthier (now there is an oxymoron) and the smokeless tobacco market seems to be taking off as well. The products created by tobacco giants such as Altria, Philip Morris, Reynolds America, and Lorillard are not going out of style any time soon. They have great profit margins, solid shareholder pay back histories, and will likely be nice little income-generators for your portfolio. For this reason, many investors who usually leave their emotions at the door when it comes to comes to distributing capital are left with a moral conflict.
Talk About a Controversial Investment
My mother is a classic “lifer” in the world of tobacco use. She started when she was young in order to look “cooler” and more grown up, and she has never been able to break the habit despite several tries at quitting over the years. To further illustrate the situation, she is a public health nurse who knows full well the dangers and risks she is taking, yet the need for nicotine and the various other chemical dependencies that go with cigarettes is stronger than that knowledge. My father-in-law is in much the same boat. He has been a pack-and-a-half-a-day smoker for decades despite being one of the smartest people I know, and a specialist in biology. There is no disputing that tobacco causes intense harm to individuals and their loved ones, the health system, and second-hand victims. It is also a fact that tobacco is addictive. So how do they tempt people into investing in them? I think it boils down to justifying our natural human greed.
Investing In Tobacco Dividends – Ethical?
“If I didn’t own the company someone else would. I don’t force anyone to buy the product, and if I wasn’t there to provide it someone else would be.” This is either a justification for owning part of a tobacco company, or the justification for being a drug dealer. Interesting that it is equally logical, and equally compelling in either case. The only difference is that in the case of tobacco you could add, “It’s legal.” Really, if the government allows it, how bad could it be right? I think talking yourself into having a tobacco company as part of your portfolio is pretty easy if you really want to. I mean seriously, where do you turn these days if you are looking for a company the Boy Scouts would endorse? Apple employs slave labour in China (as do most technology companies), Wal-Mart has stores full of clothes made by kids in sweat houses, oil companies are purported to be killing our planet while at the same time killing our wallets at the pumps, and you can now even invest in medical marijuana if you so choose. Needless to say that this whole morals and values territory is getting pretty grey. When medical insurance companies such as Sun Life are investing billions of dollars with tobacco giants such as Philip Morris, it is tough to play the good guy card and keep your hand out of the steady stream of profits.
I Hate Smoking – But Love Nicotine-Fuelled Income
Tobacco stocks are a simple product to understand, and their balance sheets are almost always strong and inviting. Sure there are constant litigation cases in the courts, but these companies have the best lawyers in the world and this stuff has been going on for decades. I would say many are in far less danger than off-shore oil drilling companies. Developing countries around the world are increasing in population far faster than Europe and North America, and these countries have very lax regulations on tobacco use, and hardly any social taboo exists either. This means that tobacco companies have plenty of room to grow and expand going forward.
Investing in tobacco stocks has become quite popular in the last few years as they are one of the few industries that are resistant to recessions (addiction will do that for you), and they know for distributing solid dividends over a long period of time – music to the ears of a new generation of retirees looking for income-producing assets to park their money in. Here is a snap shot of some the current tobacco companies on the market today (all stats taken from the May 3 edition of the Globe and Mail):
Reynold’s America (RAI): Currently trading near its 52-week high of $42.81 (with a low of $31.82). It has a P/E ratio of 14.52, and a dividend yield of 5.50%.
Altria (MO): Currently trading near its 52-week high of $32.41 (with a low of $23.20). It has a P/E ratio of 15.56 and a dividend yield of 5.10%.
Philip Morris (PM): The granddaddy of big tobacco is trading near its 52-week high of $91.05 (with a low of $60.45). It has P/E ratio of $17.95 and a dividend yield of 3.40%.
Unethical Relative To What?
Notice a trend here? It seems like most advocates of dividend investing have decided that tobacco products are someone else’s problem and are deciding they want a piece of the profits generated by nicotine addiction all over the world. I figure since we already keep the developing world in sweat shops with the products we buy (and invest in), we may as well profit from their lungs’ demise as well right? If you’re not a fan of these companies, you could always invest in one with a pure past and product like Coca-Cola right? I hear Buffett knows something about that one…
Full Disclosure – I do not currently own any tobacco stocks in my portfolio, but have considered adding them in the past, and likely will in the immediate future as well.